Securities Attorney Briefing for 6 July 2016

Securities Attorney Tom Krebs


It’s Dollar’s Time Now Post-Brexit, Top Currency Forecaster Says

For currency strategists, the past quarter was all about Brexit and calling the pound correctly. Now, the most-accurate forecaster is counting on a dollar resurgence to stay ahead of the pack. Julius Baer Group Ltd. topped Bloomberg’s latest major-currency rankings by posting some of the most bearish sterling forecasts in the run-up to the referendum on Britain’s European Union membership. It also beat its competitors in predicting the yen’s advance as a haven — a mantle, the Swiss lender says, that’s about to be seized by the greenback. “The dollar is less owned — or over-owned — than the yen as a safe-haven currency, and given that this issue of Brexit will be with us for more weeks and months, there’s a natural demand,” said David Kohl, Julius Baer’s Frankfurt-based head of foreign-exchange research. “We used to be proponents of a weaker dollar. For the next three months this could change massively.” The U.K.’s June 23 decision to leave the EU is a shock that’s reverberating across foreign-exchange markets and beyond, hurting emerging-market currencies, upending forecasts and decimating the pound. Those that were most bearish on sterling — even if they didn’t see Brexit coming — are benefiting as the U.K. currency sinks to ever-deeper lows. Julius Baer, which rose from second place in the first-quarter rankings and didn’t anticipate Brexit, is putting its faith in the underlying strength of the U.S. economy. Kohl expects the nation to bounce back after a year and a half of economic torpor, and says futures traders are underestimating the prospect of an interest-rate increase by the Federal Reserve. That, he said, will help the dollar recover from its worst start to a year versus major peers since 2011. More:

Brexit Erodes U.K. Economic Pillars as Property Investors Flee

Pillars of the U.K. economy are starting to shudder as the cost of Brexit hits home. Three asset managers froze withdrawals from real-estate funds following a flurry of selling and the pound plunged to a 31-year low less than two weeks since the nation backed quitting the European Union. Rushing to fill the political vacuum, Bank of England Governor Mark Carney signaled easier monetary policy and urged prudence on households. With the real estate tremors echoing the last financial crisis, the mounting fear is failure to control the aftershocks from the Brexit vote will propel the economy into recession. “I am expecting quite a sharp reduction in investment spending, a sharp hit to the commercial property market, probably a check to consumer spending, all of which could push us towards zero or below growth,” John Gieve, a former deputy governor of the Bank of England and veteran of the last crisis, told Bloomberg Television. Reacting to a rush by investors to redeem their money, M&G Investments and Aviva Investors followed Standard Life Investments in suspending trading in commercial-property funds that together total 9.1 billion pounds ($11.9 billion dollars). Industry analysts have warned that London office values could fall by as much as 20 percent within three years of the U.K. leaving the EU. A risk for the economy is that the property funds are forced to sell assets at “fire sale rates,” hitting the commercial sector, said Robin Henry, a partner in the London law firm Collyer Bristow. Aviva bemoaned a “lack of immediate liquidity,” while M&G noted redemptions “have risen markedly because of high levels of uncertainty.” Regulators discussed the Brexit fallout with asset managers on Tuesday in previously scheduled meetings. During the last financial crisis, real estate funds were forced to suspend operations after withdrawals surged, contributing to a property-market slump that saw values drop more than 40 percent from their peak in the U.K. “There are enough partial echoes here of the run on U.S. money funds in 2008 to provoke a sharp risk-off flight to safety,” said Krishna Guha, vice chairman of Evercore ISI in Washington. “But we underline that this appears order of magnitude less worrying than the 2008 money fund episode, being much smaller and much more localized in its effect.” More:


S.E.C. Victories Delay Challenge on In-House Judges

The Securities and Exchange Commission has successfully fended off recent challenges to its use of administrative proceedings to hear cases about potential violations. Yet the victories are a bit like winning the coin toss at the start of a football game because the courts did not resolve the underlying constitutional issues regarding the use of administrative courts to decide cases. That issue is one part of a larger debate over the S.E.C.’s increased use of administrative proceedings to impose penalties, which some have claimed gives the agency an improper “home court” advantage. The commission will have to continue to defend how it channels cases into administrative proceedings from congressional efforts to push enforcement actions into federal court. A broad financial overhaul proposal offered by Representative Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee, includes provisions that would effectively gut the use of in-house courts for cases. The roots of the dispute can be traced to when Congress, in the Dodd-Frank Act, gave the agency almost unfettered discretion to choose to seek penalties in court or in an administrative proceeding. The change raised the ire of defense lawyers, who saw cases routed to the administrative process rather than being filed in a court, where the lawyers would have greater rights to obtain evidence and have a jury decide the case. In response, defendants filed a number of lawsuits, claiming that the administrative proceedings are unconstitutional because of the way in which the in-house judges are appointed, asking that the cases be halted until the constitutional issue can be decided. A few judges agreed with that argument, putting a stop to the administrative cases. But in June, the federal appeals courts in New York and Atlanta adopted the S.E.C.’s position that any constitutional challenge must first follow the procedures in the securities laws that provide for consideration by the agency’s in-house judge and then the five commissioners before ever reaching a federal court. These opinions followed decisions issued by the federal appeals courts in Chicago and Washington that reached the same conclusion. One remaining challenge to the S.E.C.’s appointment of its administrative judges is before the appeals court in Richmond, Va., with oral argument on the case expected later this year.

Despite lawsuits, DOL is working with advisers to help implement fiduciary rule

Despite battling several lawsuits designed to eliminate a recently approved investment-advice regulation for retirement accounts, the Labor Department is encouraging financial firms and advisers to come forward with their questions about how to comply with the rule. The final version of the regulation, which requires advisers to act in the best interests of their clients in 401(k), individual retirement accounts and other qualified accounts, was released in early April. By the first of June, five lawsuits had been filed to halt implementation. The suits may be expedited, with one scheduled for a court hearing next month. In the meantime, the DOL is not shying away from conversations about the rule. “There’s no real chilling effect” from the lawsuits, DOL deputy assistant secretary Timothy Hauser said in an interview last Friday. “People are making significant changes [to comply], and we have to get into the weeds with them. We’re not going to let lawsuits change that.” Last month, Mr. Hauser abruptly backed out of an appearance at an Insured Retirement Institute conference in Washington days after the group joined one of the lawsuits as a co-plaintiff. Mr. Hauser downplayed the incident Friday, calling it “a function of my calendar.” He will be appearing at an Investment Management Consults Association conference in Washington on July 18 and “a whole lot of events in the fall,” he said. Mr. Hauser said that he had conducted about a half dozen meetings last week with firms and other groups who have questions about the complex rule in addition to many phone conversations. Steve Saxon, chairman of the Groom Law Group, represents many clients who will have to comply with the DOL rule. He gives the agency meetings a positive review. “The department has been very well prepared and the conversations have been productive,” Mr. Saxon said.

The DOL is using the feedback it’s receiving to zero in on aspects of the regulation that are causing particular concern. “You’ll see additional public guidance in the future,” Mr. Hauser said. He declined to say when the guidance will be released or in what form.

RPT-Higher exchange fees for data seen after judge nixes SIFMA case

A judge for the Securities and Exchange Commission opened the door for U.S. exchanges to charge more for their high-speed data products, a move that could reduce the number of high-frequency trading firms that trade large quantities of securities. Brenda Murray, chief administrative law judge for the SEC, last month rejected a petition by a brokerage lobby to set aside fee increases for data sold by Nasdaq Inc and NYSE Arca, an exchange owned by Intercontinental Exchange Inc . Only a small group of firms, primarily high-frequency traders, will keep purchasing so-called depth-of-book data from all providers, said Paul Rowady, founder and director of research for Alphacution Research Conservatory. The impact may be to shrink the ranks of these data-intensive firms, he said. The Securities Industry and Financial Markets Association (SIFMA), which has fought higher data fees for almost a decade, will have a hard time stopping price increases on the data in question, Rowady said. The data products – NYSE Arca’s Arcabook and Nasdaq’s Level 2, OpenView and TotalView – detail the “book,” or the amount of shares and prices on offer for pending orders. Traders use the information to gauge how the market will move.

The evidence showed that switching between data products is commonplace, the judge said. Evidence also showed that the exchange’s largest customers, identified as some 100 brokerages and high-speed trading firms, constrain data prices by routing or threatening to route their order flow elsewhere, she said.

The judge said it was clear that many customers find depth-of-book data from only some exchanges sufficient, rejecting key arguments put forth by SIFMA that most traders need the data and that one product is not interchangeable with another. The judge said high-frequency traders may require data from all the exchanges, in addition to traders taking part in auctions at the open and close of the market. But the two groups reflect a small percentage of market participants, she said in June 1 ruling that was only made public last week. The judge said NYSE Arca and Nasdaq have largely not raised their depth-of-book prices since each initially imposed fees, and when they did, most of the price increases affected a handful of large customers. It was not clear if the ruling will be appealed. SIFMA said it was assessing its legal options.

The Strange Story of a Murdered Banker in Puerto Rico

On the day Maurice Spagnoletti was murdered, his black Lexus sedan was full of balloons. It was June 15, 2011, the day before his wife’s birthday, and he was planning a celebration. Spagnoletti, 57, was the No. 2 executive at Doral Bank in San Juan, Puerto Rico. Once flush, the bank had been almost ruined by a fraud scandal, and in 2007 it was rescued by Bear Stearns, Goldman Sachs, and a group of hedge funds. The Wall Street investors had put up $610 million, but Doral continued to lose money, and they were losing patience. In late 2010, Doral hired Spagnoletti, a New Jerseyan experienced in managing large banks, with orders to reduce costs and get Puerto Rican operations under control. When the banker arrived on the island, he made a good first impression. At 6 feet 2 inches and about 250 pounds, with a strong Jersey accent and hands that he used to punctuate his sentences, Spagnoletti reminded his new colleagues of Tony Soprano without the menace. He’d walk through the Doral office, stopping at underlings’ desks to get up to speed on who ran what and how. The sun was setting on another muggy San Juan day as Spagnoletti pulled out of Doral’s bland office park downtown. His wife was waiting at home with their 6-year-old daughter. He’d flown his sister-in-law in for the party, too. The drive to his condo on palm-tree-lined Condado Beach took just 15 minutes when there wasn’t traffic. But a few minutes after Spagnoletti got onto the highway, he slowed for a backup on a bridge over a canal. Another car pulled up alongside his. Someone fired at least nine shots from a .40-caliber handgun, shattering his windows, and four bullets hit him in the head. Spagnoletti’s momentum sent his car veering off the highway, and it came to a stop in a thicket of tropical brush. The police arrived, and at 7:21 p.m. they pronounced him dead. The identities of Spagnoletti’s killers are still a mystery, and the bank overhaul that he was hired to lead didn’t work without him. Doral collapsed in 2015, the biggest U.S. bank failure since 2010, done in by bad loans and Puerto Rico’s decade-long economic spiral. The Wall Street investors who hadn’t already sold were wiped out, and the U.S. government spent $700 million to cover depositors’ losses. Today, almost everyone in San Juan banking circles has a theory about the murder. Some believe only Colombian hit men could pull off such an assassination. Others say Spagnoletti had enemies in the U.S. who caught up with him. His widow, Marisa, revealed her own theory in a 2013 lawsuit: She said he was killed because he uncovered fraud at the bank and fired an executive he suspected of embezzlement. Doral’s lawyers called her claims ridiculous, and after Marisa admitted in a deposition that she had no evidence, she withdrew the suit. Since then, new details of the killing have emerged. More:


Morning Money

BREXIT FALLOUT RETURNS — Thought the Brexit was over and the fuss was about nothing? Well, think again … FT’s Rochelle Toplensky, Katie Martin and Joel Lewin in London and Joe Rennison in New York: “The pound plumbed new depths against the dollar as financial turmoil intensified in the wake of the UK’s Brexit vote, touching $1.2961 in early Asian trading on Wednesday, its lowest level in more than 31 years. Hours earlier, the benchmark 10-year US Treasury yield fell to a record low, as investors on Tuesday sought top-tier government debt. … The latest catalyst for risk aversion was a number of UK asset managers led by Standard Life, announcing that they were halting retail investors from pulling money out of property funds. …

“With Italian banks also under pressure, the post-Brexit bounce seen for equities last week faded and reinforced demand for government paper. The clamour for havens sent Switzerland’s 50-year bond yield below zero for the first time while the 10-year Treasury yield … fell below 1.36 per cent and into uncharted territory. … Germany, France, Switzerland and Australia also saw all-time lows in yield for their 10-year benchmarks”

ASIA DOWN EARLY — Reuters: “Asian share markets turned tail on Wednesday as fears over instability in the European Union returned with a vengeance, sending the pound to three-decade lows and hammering risky assets of all stripes. …

“Concerns that central banks might not be able to soften this latest blow to global growth hit oil prices hard. Having shed 5 percent on Tuesday, Brent crude futures LCOc1 fell further to $47.57, with U.S. crude at $46.21”

WHAT’S UP WITH RECORD LOW YIELDS? — Mohamed A. El-Erian on Bloomberg View suggests it’s not about the US economy: “This week, the U.S. became the latest advanced economy to experience a decline to record levels in the yield of its benchmark 10-year government bonds, along with a continued flattening in the yield curve for its Treasury securities. But the traditional drivers can’t explain these developments.

“That also means the signals being transmitted to markets and the implications for the economy and policy can’t be analyzed in the usual way. … This notable decline in Treasury yields is not following a conventional path, particularly as it says a lot more about Europe and Japan than about the U.S.

BIG TROUBLE IN TRUMP’S FILINGS — CNBC’s Lori Ann LaRocco: “A series of filing anomalies point to a Donald Trump camp that is either unaware of campaign finance law, or is actively funneling donors’ cash to insiders, according to several experts interviewed by CNBC.

“These ‘red flags,’ as one expert deemed them, include a total lack of disclosure on which vendors staffers for the presumptive Republican nominee are paying, an ‘unusual’ six-figure payout to campaign staff for nontaxable expenses and what appeared to be double reimbursements for some employees’ expenses”

WHAT SANDERS WANTS ON TPP — POLITICO’s Daniel Strauss: “Sen. Bernie Sanders’ campaign on Tuesday shared the specific language he wants inserted in the Democratic Party platform concerning [TPP] … In a fundraising email … Sanders campaign manager Jeff Weaver shared the specific language of the amendment he would like to see inserted.

The amendment reads, ‘It is the policy of the Democratic Party that the Trans-Pacific Partnership must not get a vote in this Congress or in future sessions of Congress.’ ‘If we succeed, we will be in a very strong position to stop a vote on the TPP and to fundamentally rewrite our trade agreements to end the race to the bottom and lift up the living standards of people in this country and throughout the world,’ Weaver continued”

NEW BREXIT TURBULENCE — WSJ’s Darren Lazarus, Jason Douglas and Jenny Strasburg: “Two big British asset managers blocked worried investors from pulling money out of real-estate funds, and the pound sank to a new 31-year low … twin signs that the U.K.’s vote to leave the EU was injecting new turbulence into financial markets after days of relative calm. At the same time, the Bank of England eased regulatory restraints on British banks, a bid to allow them to lend more and keep the economy flush with credit.

“Britain is laboring through the second week after its Brexit vote with little clear direction. David Cameron has announced his resignation as prime minister, his Conservative Party is picking a successor in a sharply contested ballot and the opposition Labour Party is in disarray. Much of the postvote economic response has been left to the central bank and its governor, Mark Carney. A news conference Tuesday was Mr. Carney’s third public appearance in the 12 days since the vote”

TWINKIES TO GO PUBLIC — NYT’s Michael J. de la Merced: “Twinkies and Ho Hos are poised to find a new corporate home — and a listing on public stock markets. The owners of Hostess Brands announced on Tuesday that they had agreed to sell a majority stake in the company to a publicly traded affiliate of the Gores Group, an investment firm, for about $725 million. The transaction will be the second in which Hostess … has traded hands since emerging from bankruptcy protection three years ago.

“It also raises the stakes for Hostess, joining the public markets at a time when more consumers are shunning sweets in favor of more nutritious treats. Since 2013, Hostess has been under the ownership of the investment firm Apollo Global Management and Metropoulos & Company, which previously owned the maker of Pabst Blue Ribbon beer and specializes in reviving consumer brands”

POUND DROP HITS AMERICANS IN THE U.K. — FT’s David Sheppard: “For the half-million Americans living in Britain, London was already a city of high rents and cramped housing. Now the sharp drop in the pound against the dollar in the wake of the Brexit vote could see a wave of salary renegotiation demands. … Consultancies Deloitte and Mercer said the size of the drop in the pound could trigger adjustments under salary protection schemes, as US employees in the UK try to cover dollar mortgage and loan repayments in their home country. …

“The close business links between the City and Wall Street — which led to the rise of the NYLON tag for executives flipping between the two cities — sees a large number of American bankers, lawyers and consultants come to Britain on short-term postings each year. Mercer, whose annual cost-of-living rankings are used by many companies to determine international compensation schemes, said more than two-thirds of companies in Europe offer international employees some level of currency protection. Employers will often consider adjustments following a currency shift of as little as 7 per cent — smaller than the one-day drop in sterling on the day of the Brexit result, which saw it fall to the lowest since 1985 against the dollar”

CLINTON TO PROPOSE STUDENT LOAN CHANGES — WP’s Anne Gearan and Abby Phillip: “Hillary Clinton plans to promise a three-month moratorium on repayment of federal student loans to allow time to refinance or restructure high-interest debt, part of a larger package of education-related proposals intended to appeal to young voters. Clinton will propose the hiatus on loan repayment Wednesday … . She plans to campaign in Atlantic City, N.J., to draw attention to her campaign’s claims that Republican opponent Donald Trump has cheated workers on his way to business success.

“Clinton is framing her general election case against Trump as a choice between someone who tries to address problems such as student debt and someone she accuses of selfish motives. … Clinton addressed the problem of high student debt during remarks to a convention of the nation’s largest teachers’ union on Tuesday. Clinton said that she would allow teachers and other graduates who enter public service fields to refinance their student loans”

FED’S WILLIAMS SEES RATE HIKE THIS YEAR — Bloomberg: “Federal Reserve Bank of San Francisco President John Williams said Britain’s vote to exit the European Union probably won’t derail the U.S. economy, leaving the Fed scope to raise interest rates this year if his growth and inflation expectations are met. ‘I would see the Brexit, as it’s played out so far, as being a relatively modest risk to the U.S. outlook,’ Williams said in a telephone interview on Tuesday, explaining that the move may lower economic growth for the year by about a tenth of a percentage point to just under 2 percent.

“Williams, who next votes on policy in 2018, said he still expects unemployment to drop to 4.5 percent this year and for inflation to continue moving up. If that outlook comes to fruition, a rate hike would be appropriate this year, though he declined to ‘get into projections about when and what.’ … The concerns about China and Asia in general last year and earlier this year were much more significant’ in terms of the Fed’s ability to meet its goals, Williams said.”

Tom Krebs is a securities attorney in Birmingham, Alabama.